Legal Blog

Into The Breach

It is not often that the Supreme Court of Canada speaks with one intelligible and undivided voice. It did so in the unreported 1999 decision of Guarantee Co. of North America v. Gordon Capital Corp. Justice Iacobucci, our old professor, wrote the decision.

History

GCNA issued a fidelity bond to Gordon. Gordon’s employee stole from Gordon and Gordon looked to GCNA for payment on the bond. GCNA alleged that Gordon misrepresented certain facts in its application for the bond; GCNA then purported to rescind the bond, based on provisions in the bond contract, and returned Gordon’s premiums to it. Gordon refused to accept the rescission but did not commence its action against GCNA within 2 years of becoming “aware of facts that would cause a reasonable person to assume that a loss covered by this bond has been or would be incurred” as set out in the bond.

GCNA moved for summary judgment on the assumption that, even if GCNA did not have grounds to rescind, Gordon’s action was time-limited.

There were issues regarding the propriety of granting summary judgment and the test for it but we will not be dealing with them at this time.

Rescission-Repudiation

One of the interesting aspects of this case is the court’s summary of the concepts of rescission, repudiation, conditions and remedies. The court bemoaned the fact that rescission was referred to in many cases as the equivalent of an accepted repudiation.

The court noted that rescission is a right given to an innocent party once there has been a false or misleading representation in a contract. If the representation is a term of the contract (i.e. a warranty), the innocent party is entitled to damages for its breach. If it is substantial or goes to the root of the contract (i.e. a condition), the innocent party can demand restitution of the contractual benefits (i.e. rescission). Interestingly, the court stated that it made no comment on whether the innocent party also had a right to damages. We always thought that this was a given; it is the additional remedy that differentiates it from a breach of a “mere misrepresentation.”

Repudiation occurs by words or conduct evincing an intention not to be bound by the terms of a contract. If the innocent party accepts the repudiation, the contract is terminated, not rescinded. If it is terminated, then the innocent party can sue for damages for a breach that has already occurred; it cannot claim that the contract was never made. If it is an anticipatory breach, the innocent party cannot claim that the contract should be specifically performed because it has accepted the breach and terminated the contract.

If there is any doubt as to whether there has been an accepted repudiation or a rescission, the court should first look to the words of the contract and then, if there is doubt, the context. In our case, the contract used the word rescission and there was no evidence to displace the contractual terminology. Accordingly, the court stated that GCNA had attempted to rescind the contract.

This was an interesting discussion but one that was meaningless to the result.

Fundamental Breach

The case was really fought on whether GCNA’s allegedly improper attempt to rescind the bond also rendered unenforceable the provision in the bond requiring Gordon to commence its action within 2 years.

The concept of fundamental breach is also often used incorrectly. It is often used synonymously with the breach of condition/breach of warranty dichotomy. However, that was never its function. Its function was to determine whether a negligent party could rely on an exculpatory clause in a contract to shield it from liability.

In our case, the court first had to decide whether the concept of fundamental breach applied in situations involving a limitation period. The court decided it did.

However, the court also noted that the old manner of determining the existence of a fundamental breach had been turned on its ear in Hunter v. Syncrude, [1989] S.C.R. 426. The court in that case held that fundamental breach, as a rule of law, was dead. Instead, the court was to use a constructive approach in a two-step process:

i)   As a matter of contractual interpretation, did the parties intend the exclusion (limitation) clause to apply regardless of the breach? If so,

ii)  The court will enforce the clause unless the court feels that to do so would be unconscionable (Dickson’s test) or unfair or unreasonable (Wilson’s test).

Enforceable Clause

The court decided on the facts before it that:

1.   If GCNA gave up its right to claim rescission, it would have had a right to a 2-year certainty. By refusing to give up that right, it would be an absurd result if GCNA lost its right for certainty. The parties therefore intended the clause to apply even if there was a breach. The court felt that Gordon had 2 years to commence its action regardless of whether the breach was fundamental or not.

2.   The contract was between two sophisticated parties and it would not unconscionable, unfair, or unreasonable to uphold the intention of those parties.

Result

The motion judge’s decision to dismiss Gordon’s action was re-instated and the decision of the Ontario Court of Appeal was overturned.